A monthly review for investors and their advisors about how the quirks of human behavior

drive investing...and what you can do about it

The Misbehaving Investor

Happy Holidays!

Everyone loves to own a winning stock.

But is a portfolio made up of past winners the path to future investment success?

We welcome your feedback and questions, and wish you a happy and prosperous 2014!

All the best,

John Heldman, CFA

President

Dave Hutchison, CFA

Managing Director

About Us

Triad Investment Management manages equity and balanced portfolios, analyzing companies with a business-buyer's perspective and investing with a focus on investor behavior. Founded in 2008, the firm is 100% owned by its employees. New relationships start at $1 million.

Triad has $121 million of assets under management as of 9/30/13. The Concentrated All-Cap Equity composite return, annualized and net of fees since inception, is 11.8% vs. 6.0% for the S&P 500 Index (4/30/08 to 9/30/13).

There's something to be said for loyalty. When you go to a dance, common courtesy dictates that you don't abandon your date to dance with others. Shania sang about this in her 1993 song. Legendary Texas football coach Darrell Royal frequently said "you dance with the one who brung ya" when asked about his strategy for college football games, meaning use the players and plays that had been successful in prior wins.

Can past success be applied to the investment game? Yes. And no. Depends. Some investors ride their winners for years. But long-term winners are few and far between in the stock market. Today's Facebook or Twitter can be tomorrow's Pets.com, Lycos or WebVan. Don't remember these flame outs from the late 1990's dot-com bubble? Neither does anyone else. They've gone bye-bye.

A systematic approach that rides winners as long as the odds seem favorable might work better. So, it depends. Price, which often determines the "odds of success", can be the critical factor. At least that's our belief. Pay too much and end up on the losing end.

I thought about this as we recently reviewed the 10 largest holdings in our Concentrated All-Cap Equity composite as of September 30. We took a look at how these stocks have performed over the past 5 years, since the onset of the financial crisis in late 2008. Our holdings today bear little resemblance to the stocks we owned back then.

Why? As the market has moved higher, we've sold many of our "winners", and reinvested in laggards. Ok, some people might call them losers. Stocks that haven't done much lately. Of the current top ten, five have had negative returns over the past five years. Collectively this group is about even while the S&P 500 is up about 10% per year over the past 5 years.

Why do that? We like to think it's as simple as "Buy low, sell high." Time will tell if we're right. It can be psychologically hard to do this. Sell the successful ideas and plow the proceeds into stocks going nowhere lately. But it's all part of the process.

What, a process? Yes, a process. Invest at a significant discount to assessed value and hold as long as the gap between price and value remains wide. When the gap closes, sell and move on to where more perceived value is available. Simple process. But hard to implement. Because as humans we are often biased to favor winners, especially recent winners.

So while Shania might be right about the dance floor, and Coach Royal had the right strategy for football, when it comes to investing, it's better to analyze your common stocks with a dispassionate eye and know when it's time to part company. Unlike your dance partner, the stock market won't be offended.

-John Heldman, CFA

Past performance is not a guarantee of future results.

Results are presented net of fees and include the reinvestment of all income.